As plan auto-features become widely accepted, plan sponsors are increasingly turning their attention to retirement income strategies, according to a new survey of large and mid-size 401(k) consultants and advisors.
Nearly two-thirds of respondents believe plan sponsors want to continue serving participants after they retire, up 14% from the previous year, as aging Baby Boomers confront the challenge of managing their savings once they enter retirement. Additionally, two-thirds of respondents recommend that plan sponsors offer a retirement income tier to serve retirees, packaged with a variety of retirement income solutions, in contrast to a single, all-in-one solution.
Respondents also cite adding distribution flexibility (84%), providing access to education and tools (41%) and adding retiree-focused investment options (38%) as key strategies to retain DC plan participants once they’ve reached retirement.
The findings are based on PIMCO’s 13th annual Defined Contribution Consulting Study, which was expanded this year to include a more diverse set of respondents across the spectrum of the DC industry’s consultants and advisors. The study captures data, trends and opinions from 238 consulting and advisory firms, as well as individual plan advisors, that serve more than 109,000 clients with aggregate DC assets in excess of $4.9 trillion.
Retirement Income Design
Advisors recommend both single and multi-asset retirement income design solutions, with limited support for insurance guarantees. According to the findings, more than three-quarters (78%) prefer an equity exposure of less than 40% at retirement, while tolerance for drawdown risk declined further compared to last year, registering at 8% compared to 10%. Nearly three-quarters of respondents (72%) recommend monthly distributions, while all of the consultants and advisors preferred a distribution yield greater than 4%.
“We are starting to see a definitive shift in sentiment across the DC landscape as plan sponsors seek to tailor plan offerings not only to serve those currently saving for retirement, but also those who are already in retirement,” notes Rick Fulford, head of PIMCO U.S. Defined Contribution. “Empirically, retirees demonstrate a propensity to spend only from available income, while preserving account balances, so we’re not surprised by the emphasis on income generation and capital preservation as it relates to retirement income option design,” he explains.
Plan Sponsor Priorities
PIMCO’s study also found a substantial shift in plan sponsors’ priorities, with most respondents now ranking reviews of target date funds as the highest priority (63%). This was followed by evaluation of investment fees (44%) and administration fees (28%), simplification of investment menus (25%) and evaluation of DC OCIO and other delegated opportunities.
For plans with $1 billion or less, the preferred target date design is a packaged, "blend" strategy that combines active and passive management instead of pure passive or pure active, the study notes. Custom solutions were the most recommended choice for plans over $1 billion. What’s more, nearly all respondents believe an active management approach for U.S. bonds (100%) and non-U.S. bonds (97%) is important.
“Increased advocacy for blend target date strategies reflects the active/passive management philosophy of most consultants and acknowledges a plan sponsor’s fiduciary duty to ensure reasonable fees,” notes Fulford. His organization believes the blend approach represents the future of the target date industry, as they are seeing migration of clients from both fully active and fully passive approaches.
Other survey findings include:
- 84% believe glide path structure is the most important factor in evaluating default strategies, ahead of fees (56%).
- 31% believe the costs of managed accounts are justified, with only 6% believing managed accounts deliver superior performance to TDFs.
- 53% recognize the value of customization, but a smaller portion (37%) believe participants provide the necessary information allowing for that personalization.
- 62% believe superior portfolios can be achieved through the use of custom and white-label strategies, especially for fixed income (41%) and equity allocations (44%).
Within core menus, respondents recommend two fixed-income options excluding the capital preservation option: 97% recommend a core or core-plus strategy, and 47% recommend an income focused/multi-sector bond strategy.
Environmental, social and governance (ESG) strategies are also recommended by 28% of large and mid-sized consultants and advisors as an additional strategy to consider within the core lineup.
PIMCO notes that it will publish additional results from the study later this year.
